The University in Context:
The Economic, Demographic, Political,
and Financing Challenges ahead.

The California State University is the nation's largest university system, with over 350,000 students at 22 campuses. It is a remarkable California treasure. Over many decades hundreds of thousands have earned CSU degrees, and contributed vitally to our society and economy.

This is the nation's premier teaching university, with a faculty whose intellectual and creative talents have always been brought directly into the classroom. The CSU is known best and appreciated most by the tens of thousands of Californians who have been our students, and then our loyal alumni, and by their employers. We are the gateway institutions for the great majority of students seeking a baccalaureate education in California, and for those who seek professional training as teachers, nurses, social workers, and engineers. We take special pride in our record of service to working families, immigrants, and minority communities--all who seek to enter the world of higher education.

We are a driving forceful engine for the California dream, and we are proud of it. Walk on any CSU campus and you will see the thousand faces of the new California: our students are young and old, they work and raise families, and they come from every ethnic, racial, and religious community. The health and vitality of our state's social future depends on these students' imagination and intelligence, and on our ability to provide them every opportunity for learning. There is a direct link between the particular intimacies of university work--the classroom magic, the quiet times of reflection, the serendipitous discovery of new things--and California's long-term social and economic health.

But, just as we affect the state's future, the dramatic transformation of the state's economy, society, and politics frames our own future.


The new economy: California's economy has undergone a profound transformation in the last two decades. The major economic growth areas which have emerged to bring the state out of its recent recession are high-tech and high-tech based, service related industries, that will best employ those who are well-educated and able to move easily among careers and employers. Californians who lack adequate education coupled with skills and competencies useful across career lines, especially those who have not received at least a college degree, will find less opportunity, less advancement, and less earning capacity.

The numbers are compelling. They are reflected in both national and international trends.

* In every industrialized nation, employment in those productive sectors demanding higher education has grown greatly -- between three times (in the United States) and 30 times (in Italy and France) the average of those demanding less education.

* The gap in annual wages between those with and without college degrees widens every year. Currently, those who have a college degree earn roughly twice what high school graduates earn. The annual wages of workers without college education have actually declined (when adjusted for inflation) over the last twenty-five years.

* Unemployment is dramatically higher for those without a college education. In the United States, even during the height of the recession, unemployment for those with a college degree did not exceed 3.5%, while it averaged over 8% for high school graduates and 13% for those lacking a high school diploma.


The new demography: In an economy in which the well-educated will thrive, and those lacking education will fare poorly, the California State University has a special responsibility. We have a long history of providing opportunity for those Californians who may be the first in their family to attend college. Especially through our partnership with California's community colleges, we provide education and access to the economy for millions of Californians. As the employment profile of the new economy continues to shift towards the service and value-added industries, the demand for collegiate education will soar.

The sheer magnitude of the numbers bears reminding. By the year 2005, CSU annual enrollment will grow by 69,000 full-time-equivalent students. We face an increase of 100,000 full-time-equivalent students by 2010. This will not happen all at once, of course, and each year may show dramatic variation according to changes in the economy and unemployment. Two out of every three new students will come through the community colleges, whose numbers may also increase as more students seek less expensive ways of going to college.

The aggregate numbers tell half of our funding dilemma, to which we turn in a moment. Far more interesting is the dramatic demographic transformation of the student body, which in the CSU's case increasingly reflects the racial and ethnic diversity of California. By 2005, close to half of the entering class of students will likely come from dual-language families. On almost all of our campuses there will be no single racial "majority" group, as the numbers of Latino and Asian students will increase significantly over the next decade.

This change ought to require only that which California has always offered its people: adequate resources to meet the demand for college education, and a commitment to excellence shared by both faculty and students. It is especially galling to minority communities to see dwindling resources emerge as a crisis precisely when minority students achieve majority standing. The CSU is deeply committed to active programs of recruitment and academic preparation for communities historically underrepresented in higher education, and believes that all our students deserve the highest quality service and instruction. The CSU will make every effort to secure adequate state resources for all Californians who desire a college education.

Within the university the questions of diversity are more complex and compelling than brute resources alone. How does the faculty, increasingly diverse itself, thoughtfully account for differences in learning styles and family demands among different students? What services make "access" an active rather than passive word, where the university actively seeks the best conditions for success of all its diverse students? What education is required for full participation in a diverse society committed to democratic values?

Many of these questions prompt further and appropriate concern for resources, as do other dimensions of the demographic change. More and more students will be working full-time and raising families. More and more students will be part-time, and more working Californians will seek short-term education for career or advancement purposes. And each new student will legitimately want attentive student service professionals and available faculty advisors.


The new politics: The political consensus about the role of higher education is more fragile now than at any time in the last three decades. This is a national issue, although the framework for the conversation and some of the specifics are unique to our state. What higher education is for, and who should have access to it, are being seriously debated in government and by the media. We are accused by many of having weak standards, being too expensive, and perpetuating our institutional interests rather than serving the educational needs of students or of society. This is a profound and serious political fact to which the CSU must pay attention. We operate within an external policy environment that often does not understand us or our values and goals.

The challenges facing public higher education in California are particularly sharp. The state fiscal situation and the public policy environment make it imperative that we attempt to shape the future rather than allow current trajectories to continue. Study after study done by us and others confirm the basic framework of demand growing faster than public resources. Absent some explicit interventions to reverse those trends, through effective justification for increased public revenues and sharper attention to internal resource management, the inevitable route is either the denial of access, or maintaining access at the expense of quality. Both are unacceptable.

We have seen a generation of state legislative leadership leave because of term limits, and the arrival of new leadership that is energetic and capable, but that has not absorbed the educational policy lessons in California of the last half century. Many of our legislators are new, they are impatient because they need to make their mark in a short period of time, and they want solutions. We know what questions they will ask: how will we meet our mission to provide access and affordability; how will we ensure quality through maximum attention to the teaching and learning process; and what is the evidence for our results?

Within the CSU, we need to engage a new process if we are to find solutions to our challenges and preserve the most important ingredients of shared governance. We must maintain our momentum of moving toward a decentralized system, with greater support for individual campuses to serve different communities with different needs. At the same time, we must maintain our capacity to serve the needs of the State as a system.

There are transformative educational needs facing the institution, which must be addressed whatever the levels of state funding. To do this, the institution must pay much greater attention than before to achieving change through reinvestment and development of our core resources. The strategies of reinvestment and development are particularly important as they affect the most valuable resource of the University, its teaching faculty, many of whom will retire in the next decade. The protection and regeneration of that faculty must be a priority in the years ahead. Achieving this in an environment of greater decentralization and shared governance is a challenge, but one we believe is achievable.


The finance crisis: Over the past twenty years, through a series of constitutional initiatives that have limited legislative control over spending, California has evolved a state budget structure with a permanent imbalance between general fund revenue availability and structural demands for new program spending. Higher education spending -- specifically spending for the University of California, the California State University and student aid -- has become a "leftover," drawn from a general revenue base increasingly restricted by constitutional and statutory provisions. These provisions limit the Legislature and Governor's ability to decide where scarce resources can be spent.

The net result is that elected officials have incrementally lost both the resources and the decision capacity to govern, with particularly bad effect on higher education The percentage of state spending on higher education has dropped enormously: from $12.01 for each $1000 of personal income in 1975, to $7.22 in 1996. While the end of the current recession has meant more state funding for higher education over the past two years, the long-term outlook is that higher education expenditures as a percentage of the total state spending will decline.


The "Gap": We fully intend to do everything possible to increase state funding for the CSU, and we do not believe the people of California will abandon support for the CSU if our case is made persuasively. Through intensive public advocacy on behalf of the institution, and appealing to the current broad-based bipartisan support for higher education, we believe that the CSU can maintain and increase state support. Indeed, during this decade's worst economic environment in California's history, the respect and relative support for our university has grown meaningfully. Yet we do not imagine that even the most effective efforts will result in sufficient funding for all of our legitimate needs. Developing a sense of the range of most likely resource needs, and identifying steps to meet them, is one of the goals for this process. The starting place for this aspect of our work has been an assessment of the size of the resource/quality/funding "gap" that CSU and the state must fill if the institution is to meet future enrollment demand without a loss of quality.

CSU anticipates four types of resource "gaps" between legitimate need and probable future revenues: the operating "growth" gap, resulting from insufficient revenues to meet the enrollments of the next decade; the "quality" gap, accumulating from current unmet needs such as the eroding CSU faculty salary base, as well as for new investments for priorities such as faculty development and new technology; the "capital" gap, for resources for physical plant needs both for deferred maintenance and repair on the existing plant and for new space to accommodate the new enrollments; and the "access/aid" gap, resulting from unfunded financial need for CSU students. The details of these estimates are provided in the report of Task Force II, and are just briefly reiterated here:

The "growth" gap: Under the most optimistic scenario of possible future state appropriation growth (between 5.0% and 6.5% annually through 2005), the CSU will have a $58 million "deficit" in 2005 if enrollment demands are met. Under a pessimistic scenario, with appropriations growing at 4.5% through 2005 and then dropping to 3.5% thereafter, the "deficit" is $240 million in 2005, and grows to $520 million in 2010. The mid-range estimate is for a deficit of $240 million in 2005, growing to $365 in 2010.

The "quality" gap: CSU has unfunded needs which constitute a serious gap between resources needed to sustain quality even without new enrollment related funding needs. We estimate these deficits now would cost nearly $900 million to close, largely for faculty salaries, new technology, equipment replacement, libraries, and maintenance. The institution estimates a need for $450 million for intra-campus technology infrastructure for all CSU campuses; this does not include the cost of training in new technology to enable faculty and staff to make the best use of the new technology. An additional $115 million is needed to replace obsolete instructional equipment, particularly vital to maintain the quality of the teaching laboratories. There is a deficit of $53 million in library acquisitions; another $51 million in funding for mandatory price increases; and $13 million in maintenance and utilities costs for new space.

The "capital" gap: CSU has new capital needs both to accommodate enrollment growth, and for deferred maintenance, renovation and remodeling. Accommodating the enrollment growth will require additional space to accommodate the roughly 26% overall increase in students. If all available existing physical plant space on all the CSU campuses were used to maximum capacity (and making this estimates requires aggregating space availability, meaning a leap in imagination to use space without regard to where it is), CSU would still be short of space needed to accommodate 25,000 students in 2005, and 58,000 in 2010.

Financial aid/access gap: Student aid remains a critical element in the CSU efforts to provide access to California's students. In 1996-97, close to 45% of CSU students had financial "need" as measured by the standard methods for determining need. Because of the growing inability of the financial aid system to fund all need, we estimate a financial aid "gap" for our current students of $312 million. The number of needy students is projected to increase gradually over the next decade, to 59% of total enrollments in 2005 and 68% in 2010. These estimates assume no increases in tuition beyond annual inflationary adjustments. Even at that level of tuition growth, we project the need for aid to grow to $774 million in 2005, and to top $1 billion in 2010. Cornerstones affirms that all fee increases must be matched by adequate financial aid for needy students.

The historic level of public resources committed to higher education is absolutely unmatched by any other state in this nation. Yet the current reality of public finance in California is that public resources are no longer available to fund all of higher education's legitimate priorities at the same levels as in the past. No state financial policy framework for higher education has been developed in this new environment, and the institutions and the state are left with no analytical basis for determining where increasingly scarce general fund resources should be invested to meet public priorities. Three years ago a preliminary compact between CSU, UC and the state began to mold a long term stable planning context. What is needed is a new state policy framework for higher education finance that is animated by the goals of the Master Plan, and which can be used as a policy guide to determine what resources can be found to meet our priorities. That policy framework should shape a series of new compacts with the State, Compact II and beyond.